A few home truths
Remember all that fuss in 2009 about MPs ‘flipping’ their second homes to avoid capital gains tax? (Such was the interest generated by this phenomenon that there’s even an entry about it in Wikipedia now). Flipping is not illegal – in today’s depressed housing market it may even be the sensible option if you need to move and can’t sell your old home immediately. This is how it works.
Home-owners in the UK can claim an exemption from tax for capital gains made on selling their home (or, in tax-speak, their ‘only or main residence’). Married couples and civil partners can have only one residence or main residence between them – so long as they’re living together – but other couples can have one each. The rules are set out in sections 222 to 225D Taxation of Chargeable Gains Act 1992.
Where you have two or more ‘residences’ at the same time, the question of which of them is your main residence can be settled by giving notice to HMRC within 24 months of the start of the period in which that question becomes relevant. The notice nominating a residence for relief can be varied at any time and back-dated by up to two years. So you can nominate a property even if you no longer own it.
The last 36 months of ownership of what has at any time been your only or main residence is always treated as tax-free whatever you have used it for and this, taken with the ability to give and vary a notice nominating a residence for relief, is how flipping works.
HMRC even used to give the following example of flipping in their Capital Gains Tax Manual:
An individual with two residences, X and Y
‘… has long since nominated X as his main residence but on, say, 15 January 2012 he disposes of Y at a substantial gain. On, say, 1 March 2012, he gives notice of variation nominating Y as his main residence from, say, 1 March 2010. On 8 March 2012, he gives further notice of variation renominating X as his main residence from, say, 8 March 2010.
The outcome is that Y has been the individual’s main residence at some time during the period of ownership, albeit for only one week at the beginning of March 2010. This is enough to give the individual the benefit of the ‘final 36 months’ exemption, so he has secured three years’ relief on Y at a cost of just one week’s relief on X.’
Tellingly enough, this example has recently been removed and replaced with an example showing how the benefit of the final 36 months’ exemption can be obtained with a loss of only a ‘small proportion’ of the relief on the other residence. The reference to the notice having effect for ‘only one week’ has also been removed. I wonder why?
You can also claim a further relief (in section 223(4) TCGA 1992) if you happen to sell, at a profit, a property which at some point has been your only or main residence and has been let out as residential accommodation. The maximum gain that can be relieved is the gain arising by reason of the letting. In a simple case in which a dwelling has at all times either been used as the owner’s only or main residence or let as residential accommodation, the gain remaining after the main private residence relief will be the gain arising by reason of the letting. Letting relief is limited to the lower of £40,000 and the amount of the only or main residence relief.
According to an article in Tax Insider the Chancellor has instructed HMRC to take a tough line with those owners of second homes and buy-to-let properties who try to follow the MPs’ example.
Could that be why the CGT Manual has been changed?
Have HMRC done a flip flop?
*** UPDATE – December 2013***
For an example of a flip that wasn’t successful (because the second house had never been a residence) have a look at the case of Michael J Hart and Brenda A Harte.
It was announced by the Chancellor in the Autumn Statement (given on 5 December 2013) that the final period of ownership for which private residence relief is available will be reduced from 36 months to 18 months. Section 223 TCGA 1992 will be amended in FA 2014. The amended provision with have effect for disposals pursuant to contracts exchanged on or after 6 April 2014. There will be transitional relief for disposals under contracts exchanged on or before 5 April 2014 and completed on or before 5 April 2015 so get your skates on…
Tax lawyer specialising in business tax, SDLT and VAT